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Bill Bregar thought he was doing everything right. With his former employer’s health insurance due to run out in May 2009, he believed that his visit with his wife to the Social Security office to sign up for Medicare would be routine. He was wrong. They were told they wouldn’t be able to get Medicare coverage until July 2010. Suddenly, in their late 60s, they faced the prospect of 13 months without health insurance. “My reaction was disbelief,” he recalls. “My wife went into shock.”

Bregar, a former software engineer from Lake Oswego, Ore., and his wife, Ruth, had run afoul of an obscure rule that is little understood by Medicare beneficiaries, employers, health insurance companies and even some Social Security and Medicare officials. And their experience has led directly to their congressman, Rep. Kurt Schrader, D-Ore., proposing legislation to have the rule changed.

Obscure rule hurts beneficiaries

Under current law, working Americans with employer health coverage can postpone signing up for Medicare until after 65. When they retire, accept a buyout or are laid off, they then get an eight-month special enrollment period to sign up for Medicare Part B (which covers doctors visits and other outpatient services) immediately and without penalty.

But many people in these circumstances are able to extend their employer coverage for a year or two under a 1986 law known as COBRA, which is what Bregar did.

What they may not realize is that waiting until their COBRA coverage expires to enroll in Part B disqualifies them from the eight-month grace period. Instead, they must wait to sign up during open enrollment, from Jan. 1 to March 31 each year, and their coverage won’t begin until the following July. They also get hit with a late penalty, an extra charge added permanently to their Part B premiums.

The COBRA catch

Social Security officials explain that under the law, people can postpone signing up for Part B without penalty only while they have group health insurance provided by an employer for whom they or their spouses are still working. Therefore, time on COBRA—used after employment has ended—does not entitle them to special enrollment.

Although this rule is 24 years old, in recent months AARP and other consumer help organizations have both seen a significant uptick in the number of calls complaining about it.

The Medicare Rights Center, which tracks calls involving Part B enrollment problems, reports that this year more than 21 percent of these relate to the COBRA issue. The timing may be due to the fact that when the economic recession hit in 2008, more older Americans lost their jobs and opted for COBRA coverage without thinking to sign up for Part B—and are only now facing the consequences. Nobody yet knows how many people are affected.

Confusion, even among experts

“It’s clear from the number and types of calls we get on our hotlines that there is a lot of confusion about how Medicare works with COBRA,” says Joe Baker, president of the Medicare Rights Center. “Not only are individuals confused, but employers are as well, and the price of the confusion can be devastating for some.”

Yet the crucial Medicare regulation barring a special enrollment period for people whose COBRA coverage is ending is rarely publicized. It is not mentioned in the Department of Labor’s guidance for people considering COBRA. It is mentioned briefly on page 24 of the official handbook, “Medicare & You 2010”—but without any warning of a delay in Part B coverage. It isn’t included in Social Security’s general website information on enrolling in Medicare or in its frequently-asked-questions section—though entering “COBRA” into the site’s search engine leads to an explanation.

But many people don’t go to these sources. Instead, they rely on information from their employers, their insurance company or Social Security officials. Bregar, who accepted a voluntary retirement package from the Hewlett Packard Company in 2007, consulted all three. On an earlier visit to the local Social Security office when he turned 65, he says the official told him he didn’t need to sign up for Part B until his employer insurance ended. “What he didn’t say,” Bregar adds, was that this wasn’t true “if I stopped working at any time even if my health insurance were still in effect.”